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If founders treated their investors the same way they treated their employees

software.rajivprab.com

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Re: If founders treated their investors the same way they treated their employees

#191

Post by a13n »

actuator wrote: post #183
a13n wrote: post #173

Earlier quoted context omitted.

That's the exact purpose of stock options. From the IRS's perspective, when you receive shares in a private company, that's still income, because those shares have a specific value (determined by 409a valuation), despite them being illiquid.

Why the need for an exercise price(you can always keep it at a nominal amount like 1 cent) and short windows of redemption once you leave then? From most terms of options I have seen or heard of they have been quite restrictive compared to how flexible RSUs are.

Every year startups get a 409a valuation from an audit firm that determines what their company and shares are worth. The IRS requires that stock options have an exercise price that is equal to or greater than the share price that comes out of the 409a valuation. These are laws, not decisions made by founders/investors.

If you grant stock options with an exercise price that is less than the fair market value (share price from 409a), then that's considered income by the IRS and employees owe tax immediately.

With ISOs, the 90 day exercise window is required by the IRS. With NSOs, it can be longer, like 7-10 years. 7-10 years is obviously way more employee friendly.

Re: If founders treated their investors the same way they treated their employees

#192

Post by anon9001 »

justinclift wrote: post #145
brogrammernot wrote: post #72

Earlier quoted context omitted.

How much money do you actually need though? I’ve worked for 5 startups now and my equity payout has been 0, 0, 0, 0, and now I stand I make low 7 figures from the equity on this last company (publicly traded now). During those startups the following happened: - I saw my nieces and nephews so little they forgot my name. They were young, sure, but it still stung when they look at you like a stranger - Messed up a 8+ ye…

> ... now I stand I make low 7 figures from the equity on this last company (publicly traded now). Isn't that a "never need to work again" situation though? eg, you've effectively freed up your future to put time into whatever you want?

I'd gladly trade all the relationships I have for the ability to never work again.

If I ever finish work, it's going to be a complete reboot of me anyway.

Re: If founders treated their investors the same way they treated their employees

#193

Post by actuator »

a13n wrote: post #191
actuator wrote: post #183

Earlier quoted context omitted.

Why the need for an exercise price(you can always keep it at a nominal amount like 1 cent) and short windows of redemption once you leave then? From most terms of options I have seen or heard of they have been quite restrictive compared to how flexible RSUs are.

Every year startups get a 409a valuation from an audit firm that determines what their company and shares are worth. The IRS requires that stock options have an exercise price that is equal to or greater than the share price that comes out of the 409a valuation. These are laws, not decisions made by founders/investors. If you grant stock options with an exercise price that is less than the fair market value (share pr…

Got it. Thanks for the explaination.

Re: If founders treated their investors the same way they treated their employees

#194

Post by KorematsuFred »

seibelj wrote: post #3

Valid reasons to work for a startup: - You are a cofounder. - You have little experience and you are using this to break into the industry, and get experience on many different technologies ("wear many hats"). - They are working on a very specific problem or using a specific technology that you strongly desire to work on and it's difficult to do it anywhere else. - You want to work a certain way (remote, on the beach…

I have learned this hard way.

Re: If founders treated their investors the same way they treated their employees

#195

Post by actuator »

wskinner wrote: post #184
actuator wrote: post #168

Earlier quoted context omitted.

Can't you postpone the tax to be paid to when actual tradable equity will be delivered?

Yes, kind of - what you're thinking of is known as an 83b election. But you still owe tax in the year you are granted the stock, at the current fair market value. If your startup is pre-funding, that's fine, it will be 10s of dollars. If your startup is funded, it will be 10s of thousands to hundreds of thousands of dollars.

Yep, those amounts will be hard for the employee to pay.

Re: If founders treated their investors the same way they treated their employees

#196

Post by pc86 »

ashtonkem wrote: post #150
nostrademons wrote: post #86

So founders do treat some of their investors like this - look at every ICO, and a lot of dumb overseas money, and a good number of friends/family/fools rounds. And conversely, there are some employees that they treat with kid gloves, who basically get the investor treatment. Look at executive hires. The difference is basically two letters: "No". Most institutional investors have the ability and inclination to say no…

I think you’ve got cause and effect a bit backwards. > whenever you feel you’re treated unfairly, walk away . People will stop treating you unfairly. Walking away from a bad deal certainly prevents you from being taken advantage of in that moment, but it will do nothing to prevent the next company who knows nothing about you from trying to hoodwink you again. While the ability to say no to a bum deal is important, it…

> but it will do nothing to prevent the next company who knows nothing about you from trying to hoodwink you again

But what it does means is you won't leave until you get a good deal. And when's the last time someone left a good deal for a bad one?

Re: If founders treated their investors the same way they treated their employees

#197

Post by a13n »

laser wrote: post #157

I think startups would have a lot easier time recruiting great people if they offered Stock Appreciation Rights [1] instead of typical options. I didn’t even know SARs existed, they’re so non-standard in the startup industry, until as a founder considering an open-ended hiring offer for the first time I desperately looked for some legal upside compensation system that wouldn’t screw me in all likely scenarios. Stock…

One downside here is that SARs are taxed as ordinary income. This means you might end up paying 30-50% taxes instead of the 15-20% long term capital gains rate you'd pay on ISOs, RSUs, or selling shares from exercised NSOs.

Re: If founders treated their investors the same way they treated their employees

#198

Post by icedchai »

ahelwer wrote: post #19
try-perforate wrote: post #13

Isn't this capitalism? Labor and capital are two different factors of production. If you're willing to take the pay cut and risk associated w/ joining a startup, but are unhappy with the returns, why wouldn't you just keep your job, invest the $100,000, and get access to the preferential terms given to capital?

Good luck investing in private companies with $100k. The only way us serfs can get access to those opportunities is to chain our futures to the company and go work for them. Also means we can't diversify our portfolio like the VCs can.

You can diversify by investing in public markets, where you have actual liquidity. I've made more off of the Facebook stock I bought after the IPO than I have from any of the startups I worked for. One did have a "successful" exit, meaning the returns were positive, though nothing to write home about. I would've been better investing that money into Apple or AMD. All the people complaining about their worthless stock options need to realize that generally, the investors all got screwed, too.

Re: If founders treated their investors the same way they treated their employees

#199

Post by vmception »

nostrademons wrote: post #86

So founders do treat some of their investors like this - look at every ICO, and a lot of dumb overseas money, and a good number of friends/family/fools rounds. And conversely, there are some employees that they treat with kid gloves, who basically get the investor treatment. Look at executive hires. The difference is basically two letters: "No". Most institutional investors have the ability and inclination to say no…

ICOs aren’t investments, they are consumer products, sold into a hot consumer market where the consumers want to flip them. But where the consumers don’t actually know they are consumers.

This isn’t semantics, token sales are counted for as revenue.

Yes, its too bad that there is a colloquial action called “invest” and a legal term called “investor”

Re: If founders treated their investors the same way they treated their employees

#200

Post by foobiekr »

a13n wrote: post #197
laser wrote: post #157

I think startups would have a lot easier time recruiting great people if they offered Stock Appreciation Rights [1] instead of typical options. I didn’t even know SARs existed, they’re so non-standard in the startup industry, until as a founder considering an open-ended hiring offer for the first time I desperately looked for some legal upside compensation system that wouldn’t screw me in all likely scenarios. Stock…

One downside here is that SARs are taxed as ordinary income. This means you might end up paying 30-50% taxes instead of the 15-20% long term capital gains rate you'd pay on ISOs, RSUs, or selling shares from exercised NSOs.

Also, I don't think there's a secondary market option for SARs or similar.
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